Loan APR Vs Interest Rates

When buying a house, you must consider both the interest rate and the Annual Percentage Rate (APR) to understand the entire financial commitment. The interest rate only relates to the amount of the loan, whereas the APR calculates other factors. A loan's APR may give you better insight into the total costs of your mortgage.

Calculating APR

The APR calculates fees other than the loan, including upfront fees, discount points, the origination fee, underwriting fees, closing fees and more.

Discount Points

Discount points relate to the amount you pay the lender upfront, to ensure a lower interest rate for the loan. One discount point equals one percent of the loan and will lower the interest by 0.125 percent.

Fees Not Calculated

Unlike with a loan calculation, which is pretty transparent, calculating the APR varies with each financial institution, which means that some fees may not be included in the calculations, which can skew the total paid. Make sure to ask which fees, if any, are excluded from the APR calculation.

The Truth in Lending Act

Since the APR includes a number of fees that might otherwise be overlooked, The Truth in Lending Act mandates that lenders must post the APR with the interest rate.

Fixed-Rate versus Adjustable-Rate

The APR is a better indicator for fixed-rate mortgages, since variable rates can't be predicted.

Resources

• Interest Rate Vs APR
• Interest Rate and APR
• APR